Buyer Beware: Proposed GST withholding on Buyers of New Residential Property and Land
An Exposure Draft of legislation has been released signaling the Government intent that from 1 July 2018, Purchasers of new residential premises or potential residential land purchased in a GST taxable supply will be required to withhold and pay the Australian Taxation Office (ATO) 1/11th of the purchase price.
Whilst the devil will be in the final detail, these measures if passed, will fundamentally change the way in which settlement of new residential properties and some residential land takes place on or after 1 July 2018. All parties will need to ensure that any legislated changes are appropriately included in land sale agreements and obligations performed.
Key points to note are:
- Measures were announced in the 2017-18 Budget to deal with perceived non-compliance by Property Developers who collect GST at settlement but dissolve the business before lodging the BAS and remitting GST – commonly referred to as ‘phoenix’ arrangements.
- If the legislation is passed, the changes will impact defined properties transactions settled on or after 1 July 2018.
- There are transitional measures where the amendments are to apply to the taxable supply of new residential premises and potential residential land where any of the consideration (other than the deposit) is first provided on or after 1 July 2018, regardless of the date of the contract of sale. For pre-1 July 2018 contracts the withholding obligation will not apply if consideration (other than the deposit) is first provided before 1 July 2020.
- From 1 July 2018 (subject to transitional measures), Purchasers must withhold GST from specified property settlements and pay this amount to the ATO, calculated by 1/11th of the price.
- The Purchaser must pay the amount of GST withheld on or before the day on which any consideration for the purchase (other than a deposit) is first provided.
- If the Purchaser does not withhold and remit the amount of GST to the ATO, the Purchaser will be liable to a penalty equal to the amount of withholding payable unless there is a reasonable belief by the Purchaser that the premises are not the taxable supply of new residential premises or potential residential land.
- Where the Purchaser pays a withholding amount to the ATO, the Vendor will be entitled to a GST credit of that amount.
- The Vendor of a property is prohibited from making a taxable supply of residential premises or potential residential land unless 14 days prior to the time of supply (generally settlement) they provide a written notice including prescribed information. If the Vendor does not give the written notice they are liable to a penalty (could be as much as $21,000).
- If a Vendor, who lodges BASs quarterly, is calculating GST under the margin scheme the Purchaser is still liable to withhold 1/11th of the price paid but the Vendor is entitled to seek a refund (outside of the BAS lodgment process) on the difference between the amount withheld and the amount calculated as being payable under the margin scheme. This represents an opportunity for the ATO to verify margin scheme calculations.
- If a Purchaser withholds 1/11th of the price in error, the Vendor is entitled to seek a refund of the amount which is subject to prescribed administrative procedures.
Whilst we await further details for the proposed legislation, it is essential that the real estate industry braces itself for these changes and seeks advice as to how best implement them for the benefit of their business and their clients.